Patents and Innovation Economics

David Boundy's Excellent Analysis of the First to File Issues

David Boundy, a well known well respected patent attorney, provided the following analysis of the first to file issues in a comment on the blog Patently O.

The problem here is that the Big Company proponents of the bill and the small company folks are talking past each other, and both are right on different pieces.

The section of the bill titled “first to file” has two completely distinct effects — (1) changing the § 102(g) tie-breaker rule, for deciding between two near-simultaneous patent applications directed to the same invention, and (2) weakening the §§ 102(a)-(f) grace period, the deadline for filing a patent application.

The proponents are correct that first-to-file vs first-to-invent as a tie-breaker between two near-simultaneous patent applications for the same invention yields no significant difference in the outcome, but first-to-file (if the bill changed only the § 102(g) tie-breaker rule) is almost certain to yield significant cost-savings and efficiencies.

The answer is — so what. The § 102(g) tie-breaker rule affects just over one hundred patent applications per year.

The small business folks are concerned about the other part of the same section, the §§ 102(a)-(f) grace period, the deadline for filing a patent application. The grace period is a make-or-break issue for small companies and startups, that need the extra time to seek investors, test their inventions, and the like. The grace period rule is a far larger issue — it affects hundreds of thousands of inventions per year, largely by taking away the time to investigate, think, and make careful efficient economic decisions, and decide not to file patent applications to inventions that turn out to be duds. Those applications are not filed today, but will be filed under Patent Reform, costing small companies about $1 billion per year. And they will bog the PTO under 50,000 to 100,000 more applications, most of which are written in haste, and most of the incremental applications directed to inventions that would have dropped out of the system with more time to think.

The weak grace period of S.23 creates an impossible catch-22 for small companies. Under patent reform, entrepreneurs won’t be able to discuss their ideas with potential investors or other strategic partners until after a patent application is filed because of the risk of losing all patent rights. On the other hand, many entrepreneurs don’t have the money available to file patent applications until after they have funding in hand. This circular dependency will make it impossible to proceed. Current law gives small companies a way out of this deadlock: they take advantage of the grace period to discuss their ideas with investors and partners while they work to get their company running, and file patent applications once investors come on board. But the changes in S.23 create commercially-unacceptable risks for companies that must seek outside investors and partners unless the inventor can find the many thousands of dollars to file a patent application first. That change in the grace period is just fine for multinationals like Kodak, IBM, GE, the big Pharma’s, etc. but for small companies and startups, it’s simply unworkable.

(Note well, all patent attorneys not working in-house—-a weak grace period will send your malpractice premiums through the roof.)

Two economists at McGill University (one of Canada’s two premier universities) studied the economic effects on Canadian inventors and companies when Canada made the same switch in 1989. They found that Canada’s shift to essentially the same weak grace period as in S.23 created no significant benefit, but selectively disadvantaged small companies and domestic-focused companies, and favored large multinational companies. The McGill authors specifically noted that the adverse effects on the U.S. would be larger than they were in Canada, because of the U.S.’s larger fraction of small companies, and larger reliance on our domestic markets.

The data are pretty clear on both sides. The change in § 102(g) tie-breaker rule makes sense, and change to the § 102(a)-(f) grace period rule will be destructive to the U.S. economy. The latter effect is far larger.

Call your representatives, and call your clients and ask them to call your representatives. All that is required for the triumph of evil is for good men to do nothing

The two key papers, analyzing empirical data from Canada and Europe, are

Related

Say an inventor invents on Jan. 1 and files before Dec. 31 but in the meantime the idea is publicized and by the time he files (before Dec. 31) the idea is “obvious” to everyone whereas before he invented it was obvious to no one. What does S.23 do in that case?

From what I have heard, it seems that “certain interests” would only allow the inclusion and passage of the fee diversion provision if the patent reform bill also contained a switch to first-to-file. In other words, “no honey, no money.” The USPTO’s dire straits — and the corresponding strain on innovation and the economy — appear to have been enough to seal the deal. There’s a reason some compare law-making to sausage-making; it’s not pretty.